Better Collective A/S (BETCO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Better Collective Q3 2021 Presentation. [Operator Instructions] I would now like to hand the conference to your speaker today, Jesper Sogaard. Please go ahead, sir.

Thank you very much, and welcome to our Q3 presentation. My name is Jesper Sogaard, I'm the Co-Founder and CEO of Better Collective, and with me today is CFO, Flemming Pedersen. Flemming and I would like to welcome you all to Better Collective's webcast presentation in connection with the 2021 Q3 report covering the period from July 1 to September 30, which we released today. Thank you for tuning in and for showing interest in Better Collective. Now let's get going. Please turn to Page 2 where we display our disclaimer regarding any forward-looking statements in this presentation. I ask you to please pay attention to this. Please turn to Page 3. The agenda for today's presentation is structured as follows. As always, we'll start by going through the business highlights for the quarter. Hereafter, Flemming will walk you through the financial performance for the quarter and dive into some of our most important KPIs. Following the financial review, I'll be reviewing our business areas and fill you in on progress and relevant updates. I'll finish the presentation by highlighting key takeaways for the quarter. Last but not least, we will as always open up for a Q&A session. Please turn to Page 4. Q3 was overall a great quarter made up by low season months, July and August, followed by September, which marked the beginning of the high season for major sports leagues, not least in the U.S. As you will hear during this presentation, our continued solid performance was especially driven by the U.S. business, which outperformed our expectations and by our media partnerships, which yet again delivered prime results. I'm very satisfied with the positive development of our business during a quarter where we also faced some headwinds from low sports win margins. Please turn to Page 5. The quarter showed strong underlying growth on all major KPIs. However, revenue was impacted downwards by low sports win margins in July and August. The sports win margins were negatively affected by larger operators accelerating summer marketing campaigns like free-bets, retention bonuses, et cetera, as well as continued strong NDC performance, where new depositors received sign-up bonuses. Nonetheless, the quarter reached revenue of EUR 45 million, which equates 148% increase, of which 29% was organic growth. Our operational earnings increased by 62% to EUR 14 million. Cash flow from operations before special items was EUR 10 million. Earnings margin and cash conversion were both satisfactory and in line with our financial targets. For the numbers of new depositing customers in Q3, we established yet new quarterly record, as we sent more than 200,000 NDCs to our partners, which equates a growth of 110%. Flemming will revert with more information regarding the financial performance, including some insights into the underlying performance of the business. Please turn to Page 6. Now let me share some of the business highlights with you. What really excited me in the recent quarter are the green dots on the slide. September reached a new revenue record of EUR 20 million, which equates to 45% of the total quarterly revenue. All major KPIs developed very well despite the seasonality. However, as indicated by the red dots, revenue was impacted downwards by very low sports win margins in the low season months of July and August. And actually, again, in October, which we also disclosed in our Q3 report. Following the proof of concept for our media partnership strategy last year, we continue to see very strong performance from this business area that includes partnerships with The Daily Telegraph, nj.com and 3 other partnerships, which were signed in Q2 of this year. For Q3, the partnerships delivered almost 45,000 NDCs, and discussions are ongoing for further partnerships. Our U.S. business also performed strongly with Q3 revenue of more than 5x compared to the Q3 last year. As mentioned earlier, all our U.S. assets performed strongly, including the newly acquired Action Network. Revenue for the September jumped to EUR 8.9 million or more than $10 million, which in part was accelerated by the State of Arizona opening for online sports betting as well as by entering the high season for U.S. sports, in particular, the NFL season. In September, we acquired the Dutch Soccernews.nl and Voetbalwedden.net to gain a leading position in the newly regulated Dutch online sports betting market. We have seen a positive start for the Dutch market within which we have had no business prior to the regulation. In Germany, a long-awaited new gambling regulation came into force on July 1. The market development has so far been in line with our expectations. And for Better Collective, September revenue from the German market was on par with the monthly average in the first half of the year. Based on the current performance, revenue for the full year 2021 is expected to exceed 2019 and 2020 respectively, with expected continued revenue growth in 2022. Please turn to Page 7, where I'll give the word to Flemming.

Thank you, Jesper. Now let's take a deep dive into the financials for Q3, and please follow me to Page 8. Before we really dive into the numbers, I would like to briefly present our segment reporting as this setup is still fairly new. Following the acquisition of the Paid Media business last year, we introduced the segments Publishing and Paid Media. In Q2 this year, following the acquisition of the Action Network, we further introduced the geographical segment split between the U.S. and the rest of world. Our Publishing business include revenue from Better Collective's proprietary online platforms and media partnerships where the online traffic is coming either directly or through organic search. Our Paid Media business include lead generation through Paid Media or PPC and social media advertising. The earnings margins within Paid Media is typically much lower than within organic traffic due to the direct payments to the companies providing platforms for online advertising, such as Google and Facebook. We find the geographical segmentation relevant as the U.S. market now isolated is expected to constitute more than 20% of Group revenue on an annualized basis and is a key growth market going forward. Key U.S. brands within the U.S. sports betting include the Action Network, VegasInsider, Sports Handle, US Bets and Scores and Odds, whereas RotoGrinders is focused on Daily Fantasy Sport. The Rest of the World segment includes all other markets in the U.S. and historically, the European markets are strong, but are also more mature. With that in place, please turn to Page 9. Revenue growth in Q3 was solid compared to the same quarter last year. Total revenue for Q3 was EUR 45 million, which is a 148% growth compared to the same period last year. The organic revenue growth was 29%, and the revenue split was 69% coming from Publishing and 31% from Paid Media. Revenue share accounted for 32% on the total revenue, with 51% coming from CPA, 7% from subscriptions and 10% from other income. Overall, the income from revenue share increased to almost EUR 14.5 million in Q3 '21. At current, the U.S. market is predominantly a CPA market, but our U.S. business also includes increasing revenue from subscriptions, implying solid growth in total recurring revenue. Following a record breaking Q2, we saw a new all-time high number of more than 200,000 NDCs in Q3, a growth of 110%. An increasing number of NDCs are sent on revenue share and hybrid deals, including NDCs from Paid Media segment. And as Jesper mentioned, we saw a continued strong performance from our media partnerships with almost 45,000 NDCs. Please turn to Page 10. The quarter showed strong underlying growth, however, revenue was short-term impacted by low sports win margins in July and August for some larger operators' revenue share counts, which reduced revenue by approximately EUR 2.5 million compared to the historical average. In this case, the low sports win margins are the outcome of sports results unfavorable to bookmakers and large promotion campaigns, which we saw during the summer. Adding to that, the high number of NDCs sent by us also dampened the margin short-term. Operational earnings in Q3 EBITDA increased 62% to EUR 13.6 million. The Group EBITDA margin was 30% compared to a margin of 46% in the same quarter last year. The overall EBITDA margin for '21 is affected by the addition of the lower paid margin Paid Media business, which we implemented with the acquisition of the Paid Media business in October last year. Despite Q3 being low season with low sports win margins, the Publishing business delivered 40% EBITDA margin, including the U.S. business that saw a 37% margin for the quarter. Costs in the quarter were impacted by the Action Network acquisition in May '21. Therefore, cost increased to EUR 31.8 million from EUR 10 million last year. Additionally, the cost increased EUR 4.5 million from Q2 '21, mainly due to the impact of Action Network being consolidated with the full quarter. Publishing costs reached EUR 18.9 million, whereas Paid Media cost reached EUR 12.9 million. That said, we remain very focused on controlling our business via the EBITDA margin. Please turn to Page 11. Looking at the cash flow and balance sheet, the Q3 operating cash flow before special items was EUR 10 million with a cash conversion rate of 76%, impacted by the high revenue in September that increased accounts receivable and thereby working capital. Cash flow from operations before special items was EUR 37.6 million where acquisitions and other investments reduced the cash flow with EUR 201 million year-to-date. By the end of Q3, Better Collective's capital reserve stood at EUR 64.1 million. Net debt-to-EBITDA ended at 0.86, well below our financial targets of 3.0. Please turn to Page 12. Speaking of the financial targets, allow me quickly to revert to our financial targets for '21, which remain unchanged. Growth in the Publishing segment has exceeded prior expectations, whereas Paid Media sees lower growth than we anticipated, which is reflected in an adjustment of the detailed segment targets. With the total organic growth target intact of more than 25%, the split has been adjusted in Publishing to now more than 40% from previously more than 25% and in Paid Media more than 15% from previously more than 25%. We expect that we will present new financial targets for 2022 when we publish our Q4 report. Please turn to Page 13. Coming back to the revenue and growth, let me walk you through some of our internal key performance indicators in the following slides. Please turn to Page 14. First, KPI that we look at from a Group point of view is force wagering, which is growth in the underlying betting volume on our revenue share count. For this KPI, we have added historical numbers from acquired companies and indexed them all back to 100 starting in Q1 '18. Please note that the figures represent Better Collective's aggregated data sources accounting historically for a certain percentage of our annual commission earnings. As the graph depicts, the underlying betting volume in the revenue share-based accounts increased over time with stable growth in recent quarters. This we mainly attribute to the many NDCs that we have sent in throughout the years and accelerated in the last quarters. In Q3 and Q4 of 2020, we saw very high performance in terms of sport wagering in our European revenue share counts. Following by a strong Q2, which landed at all-time high index of 207, Q3 lands slightly below on index 201. This is very encouraging considering that July and August are low season for major sports leagues. And it is also a strong indicator for the increased value in the player databases that we have built over the years. And as mentioned before, this is reflected in the absolute income from revenue share count. Please turn to Page 15. In addition to the betting volume, the important KPI is the average sports win margin on revenue share counts. In other words, an indicator for what percentage is paid out on the volume. We have used the same indexing as in the previous graph. And what can be seen is that the market fluctuates over the quarters and that Q3 was at index 63.3%. The average index number in the quarter shown is 82.3%, and as such, Q3 lands significantly below historical average. October also presented a low sports win margin, actually an all-time low, as we also disclosed today. However, as always, we view these fluctuations as being trenched, but important to understand when reviewing short-term performance. With that, I will pass the word back to Jesper, and please follow to Page 16.

Thanks, Flemming. For the following, I will walk you through updates, relevant news and regulatory changes relating to the U.S. and Rest of World segments. At the end of the presentation, I'll return with what I believe to be the key takeaways for Better Collective's Q3 performance. Please turn to Page 17. The acquisition of Action Network has placed Better Collective in a leading position within sports betting media in the U.S. and creates a strong foundation for benefiting from the continuous regulation of the U.S. betting market. Performance of action since the time of consolidation has been strong across KPIs, including a significant audience growth. Overall, the U.S. business delivered a strong performance on the back of Arizona opening up for sports betting and the start of the NFL season in September. Revenue reached EUR 8.9 million in September, delivering 62% of the U.S. revenue in the quarter. Revenue in the U.S. business was EUR 14 million in Q3, which is more than 5x the revenue in Q3 last year, while the EBITDA margin for the quarter was 37%. As mentioned earlier in this presentation, Action was included with 3 months instead of one as in Q2 this year. And as a result of this full consolidation, costs in the U.S. business increased in Q3. Better Collective became a licensed vendor in New Jersey in 2014. And since then, our U.S. presence has grown tremendously. We're currently live in 13 U.S. states. In the coming years, the U.S. is a key market for us to expand our geography and to establish a base from which Better Collective can grow organically. We are excited about the upcoming sports betting regulation in the State of New York, which is expected to become the largest sports betting market in the U.S. Recently, 9 operators were awarded sports betting licenses, the majority of which are already our partners. Even with a significant tax burden of 51%, we expect a competitive market with the opportunity for Better Collective to generate significant revenues. Betting is expected to commence in January 2022, just in time for the Super Bowl. Given the continued pace of new states regulating, we expect the U.S. market to continue growing fast and our U.S. revenues to surpass $100 million by 2022, with positive and increasing operational earnings. Please turn to Page 18. The Rest of World business includes all other markets, excluding the U.S. Historically, the European markets are the stronger, but also more mature markets. Our new opportunities in focus include LATAM, Canada and the Netherlands, as upcoming regulation of these markets offer new opportunities. Revenue in the Rest of the World market was more than EUR 30 million in Q3, doubling from EUR 15 million in Q3 last year. The cost tripled to EUR 23 million with the Q3 2021 EBITDA margin of 27%, decreasing from 51% in Q3 last year. The margin was negatively impacted by the low sports win margin in July and August as well as by the October 2020 acquisition of Atemi, which resulted in the implementation of the significantly lower margin Paid Media business. Now let's take a look at some recent regulatory updates within this business area. The new German regulation came into force on July 1. A couple of years back, we made the decision to focus on sports betting and scale down casino activities in order to minimize the risk of having to terminate activities to comply with new regulation. With the past year, we have further adapted our business models in collaboration with our partners to comply with the new regulations as more details followed. With this preparation, the transition has resulted in little to no change in performance for Better Collective. The German market developed as expected with September revenues on par with the monthly average in the first 6 months of 2021. In the Netherlands, iGaming regulation came into effect on October 1, with expectations for the market to become Europe's fifth largest in a couple of years. Up until the regulation, iGaming was prohibited, which is why we have had no prior operations in the Netherlands. Following our recent acquisitions of Soccernews.nl and Voetbalwedden.net, we find ourselves in a leading position in the Dutch online sports betting market. Currently, 10 licenses can -- licensees can legally offer online sports betting and casino. Around July 2022, we'll be able to get a more complete picture of what the online gambling market in the Netherlands will look as some parties have been excluded until then because they targeted the market in the years prior to the regulation coming into effect. However, the exclusion is not permanent and these parties will likely become active in 2022. Canada's first province, Ontario, is expected to allow online betting from the end of the year. We may expect for other provinces and territories to show interest in opening up for the competitive gambling market in the future. Therefore, we are preparing to roll out key U.S. and international brands in Canada as soon as regulation allows. Sweden's temporary online gambling restrictions which were imposed during the pandemic, including SEK5,000 or roughly EUR 500 monthly deposit cap for online casinos ended on November 14. As performance has been dampened by these restrictions, we expect some growth as the market conditions normalize. Please turn to Page 19. We have now reached the end of our Q3 presentation. Please turn to the next page where I'll walk you through the key takeaways for the quarter. Firstly, Q3 was a solid quarter in spite of the seasonality, and September reached a monthly all-time high revenue. In Q3, we also saw record performance for our media partnerships, which almost delivered 45,000 NDCs, and we are currently preparing for more of such partnerships. Our continued strong performance was especially driven by our U.S. business, which outperformed expectations. Additionally, the U.S. revenue for September jumped to EUR 8.9 million, which reflects a strong beginning of the high season for U.S. sports. We see regulation opening new business opportunities in several markets. Lastly, I would like to welcome all new colleagues who joined the Group during Q3. Together, we now count more than 700 people in the Better Collective Group. This concludes our webcast presentation for Q3 2021. And I'll now pass the word back to the operator and open for questions from the audience. Thanks a lot for listening in.

[Operator Instructions] There are no questions from the phone at the moment.

We'll take questions from online. It comes from Casper Nielsen. And the question goes, sports win margin are trending down since Q1 2018, do you expect the downtrend to change? And if so, when and how? We have seen this sort of trend up of sports win margin being lower since that quarter, and it actually coincides with us seeing good performance since that quarter in terms of new depositing customers. So that actually is the main reason for that, I would argue. In a steady state where we don't see any new depositing customers going into our accounts and sort of growing as we have seen in the past, we would expect the margin to normalize. So it's not like there is any changes fundamentally in the sports win margin, which I think you can see a testament to if you look at other -- if you look at bookmakers or bookmaker software providers that also report on the margin. So our decline is mostly related to a strong growth in new depositing customers. We have another question, which relates to Slide 15, which is also the sports win margin. So I would assume that it's simply the answer I just gave. If not, then please rephrase the question. So we know what it's about. We'll go on to the next question, which comes from Mikael Johansson. And it goes, congrats guys. Would it be possible to elaborate a bit on new media partnerships and what you expect from these going forward in the long-term. What is your strategy? They have already become a significant part of NDC. Yes, it is significant in our business now, and it's also a part of the business, which we believe a lot in, and therefore, actively are working on creating new media partnerships. And we actually see a potential force collaborating in almost any given market if we find the right media partner. And we now have a very proven business case that we can demonstrate. So conversations are good and we simply have an attractive proposition to the media groups. So yes, we have conversations ongoing and it's definitely an area where we believe we'll see growth in the future.

Operator, if you could, please?

We have one question from Hjalmar Ahlberg from Redeye.

A few questions for me, starting with maybe your revenue in October, if you would -- I mean, look at the normal sports betting margin, would you say that you have reached -- would have reached a new all-time high with that considered?

The short answer is yes.

Got it. And then on the U.S., which was very impressive this quarter, and you mentioned among other, Arizona opening up. Did that have a big kind of a one-time impact from new flow of players, let's say?

Yes, we saw a good performance in Arizona. And I think that goes for all states. When they open up, we see sort of a pent-up demand that is sort of going straight into the market. So yes, Arizona was very strong because of that opening. So it will -- you can say normalize, but still, it's a state where performance is good. But there is always a pent-up demand when a new state launches.

Got it. And interesting, you mentioned New York here, which has a bit different regulation maybe compared to other states, but you see it as a good state anyway. Do you think -- I mean, KPI levels will be lower in this market compared to others if there's a little bit less competition or you think there is similar levels?

We actually -- we were quite pleased to see that we have 9 bookmakers being able to operate in that market. That creates that strong competitive dynamic, which is great for our business. [Technical Difficulty] unlike the rest of the markets that we have in the U.S. We know it's a market which is of high interest to all the operators that are awarded licenses there. And we know there are also operators that didn't get a license that surely would like to enter that market at some point, if possible.

Got it. And a question on revenue share mix in U.S. going forward. Do you see that revenue share contracts or becoming more and more available for operators at this stage or should we expect it to be the majority of revenue in the U.S. for the near-term?

Well, CPA will continue to be the majority of revenue, but we have ongoing dialogue with our partners about revenue share. And we believe that it will be growing over time the revenue share part in the U.S. revenue as well.

Got it. And also a question on your mix Paid versus Publishing going forward. Should we view, I guess, the Publishing business -- or sorry, the Paid business is kind of opportunistic. I mean, if you get good returns then you increase the investment there or should we view it like a more stable percentage of the total revenue over time?

No, you are right in the sense that it's sort of a fine margin business where when we see strong performance, yes, we will scale that, and that is the attractiveness of Paid is that it's extremely scalable. But sort of looking ahead, we expect this to grow moderately and well, but it's slightly more unpredictable than Publishing in nature.

Got it. And maybe a final question. I mean you mentioned your strong cash position here, what's your outlook for M&A? Do you see a lot of assets being available? And how about valuation and prices in the product market?

Well, M&A will continue to be a very important part of our strategy and we have a strong pipeline. So there's always conversations ongoing. And it's, of course, in the nature of M&A, that timing is extremely difficult to predict, but we're definitely optimistic that we'll continue to acquire businesses at prices where we will find them attractive. As I think we have said before that there is a difference when you look at the U.S. and Europe of sort of multiples that are being paid, but that obviously is due to the growth nature of the U.S. compared to Europe.

There are no more questions from the phone. I will hand back the conference to Mr. Sogaard.

[Technical Difficulty] question and that has come from Matthias Ackermann. With U.S. revenues increasing strongly, BC's exposure to the U.S. dollars versus Swedish krona exchange risk will be getting bigger, will you hedge that? Basically, we are not at the moment considering hedging U.S. dollars. It's a conversion risk at the moment. And right now, you can say, we have a limited exposure in cash flow flowing back to Europe. So it's not something that we are hedging. It's of course a good question and something that we monitor over the time when a need to do hedging. By nature, you can of course always hedge cash flow to a given period, and that's also why we just see that as part of the business. I think that was answer to Matthias, hopefully. And then we have a follow-up question on the Slide 15 from Giorgio M. Going back to Page 5, could you explain the methodology to calculate such index? Well, what we have done is that we have taken sort of the historical revenue share activity from select partners and indexed both on the turnover and sports win margin. And we actually used to go even further back, but since the business has changed so dramatically, we have indexed it now from Q1 '18. But we also include the historic numbers for our acquired businesses. So it is a like-for-like development that we see from Q1 '18. And as we already talked about, you do see sort of the trend of the sports win margin being lower, but it was also on the back of Q1 '18 being a very high margin quarter. So essentially, the average will be lower than what we saw in Q1 '18. There's a question from [indiscernible]. Question goes. sports wagering Q1, Q2, Q3 are not growing in 2021 compared to the same trend that was happening in 2019. Can you elaborate why it is happening? Is it a matter of seasonality or it will revert in Q4? Actually, it is growing. There will of course be fluctuations when you compare years. But yes, there is an element of seasonality in the sports wagering. Let's say, what we are really focused on is that it grows over time, the index and behind that the absolute number because that is the value -- showing the value of our player databases being on revenue share. But yes, there can be quarterly fluctuations. And then another question from Giorgio M. Is most of your M&A pipeline in the U.S. or Europe or other regions? We actually see targets from all over the world, most from U.S. and Europe, but we are basically getting inbounds quite often from both European businesses and American businesses. I think it's very known in the market that Better Collective is acquiring businesses in this industry. And I think we are also viewed as an attractive acquirer. So we get a lot of inbound targets that reach out to us. And at the same time, we also do sort of selective outreach to targets we find interesting. And with that, I think we will conclude this webcast for Q3 2021. And thank you very much for the questions and listening in. Have a nice day.

That concludes the conference for today. Thank you for participating. You may all disconnect.